Half-year Report

RNS Number : 6646J

JPMorgan US Smaller Co. IT

20 August 2019

 

LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMorgan US Smaller Companies Investment Trust plc

Half Year RESULTS for the

six months ended 30th June 2019

Legal Entity Identifier:  549300MDD7SOXDMBN667

Information disclosed in accordance with the DTR 4.1.3

The Directors of JPMorgan US Smaller Companies Investment Trust plc announce the Company's results for the six months ended 30th June 2019.

CHAIRMAN'S STATEMENT

Performance

The backdrop to US markets over the past two years has been a recurring theme of concerns over trade policy and the direction of interest rates. I am, however, delighted to report that despite these 'Groundhog Day' concerns the Company's net asset value (NAV), in both absolute and relative terms, performed strongly. The NAV increased by 21.2% which compares well with the increase of 16.9% in the Russell 2000 index in sterling terms. Our share price rose by 19.0%, lagging the increase in NAV and resulting in a widening of the discount to NAV at the end of the period under review.

Discount and Premium

During the six month period to 30th June 2019 the Trust's share price (with dividend re-invested) rose by 19.0% compared to an increase of 21.2% in NAV; this resulted in the discount to NAV at year end moving to a discount of 4.9%. The relationship between our share price and the NAV is monitored on a daily basis by the Board and our professional advisers, and to help with the management of the discount we have in place the authority to repurchase up to 14.99% of the Company's issued share capital. Although, as has been written in the past, aligning our share price movement with the change in the NAV is always going to be a challenge as it is more art than science, the Board will continue to be proactive on this issue. The authority to repurchase shares has been used during the first six months of 2019 and a total of 20,000 shares have been purchased into Treasury. At the end of June the Company held 20,000 shares in Treasury. The Company has purchased an additional 289,000 shares into Treasury since the period end.

Gearing

In April 2019 our revolving credit facility with Scotiabank was renewed at US$25 million with an option to draw a further US$10 million. As at 30th June 2019 US$20 million was drawn and the portfolio was 2.8% geared. The investment managers employ the Company's gearing tactically, within a strategic range set by the Board.

Change of Annual Management Fees

The Board is delighted to announce that following a review of the Company's investment management fee arrangements with JPMorgan Funds Limited ('JPMF') the annual management fees are to be reduced. With effect from 1st July 2019, the annual investment management fee, currently 100bps of gross assets, with no tiering, will be charged at an annual rate as follows:

- 90bps on the first £100 million of gross assets (excluding any holding in the JPM Liquidity Fund);

- 75bps on gross assets in excess of £100 million (excluding any holding in the JPM Liquidity Fund).

Gross assets excluding the holding in the JPM Liquidity Fund totalled £198,153,728, as at 1st July 2019.

Both the Board and JPMF worked together constructively in agreeing this new investment management fee arrangement. Whilst determining the appropriate level of fees took into account a range of factors, the overriding focus was our obligation to the Company's shareholders to ensure they receive good value investment management. The Board believes that this new fee structure puts the Company in a competitive position relative to peers, and recognises the expertise and resources that the JPMorgan Asset Management investment team bring to this specialist asset class.

Change to Allocation of Expenses

Following a review of the Company's accounting policies, the Board has changed the allocation of expenses to 80% from capital and 20% from income (previously 90% and 10% respectively). This reflects the current expectations of the split of long term future returns between capital and income, as required by the AIC SORP, and is principally driven by growth in dividends from underlying portfolio companies, supported by strong cash flows. This change is effective from the 1st January 2019.

Illiquid Holdings

Given recent scrutiny on holding unquoted and illiquid investments, it seems appropriate to clarify the Company's current policy and structure for the benefit of our shareholders. The portfolio does not consist of any unquoted investments, nor indeed are there plans to explore this area of the market, as the investment managers believe that there are more than enough investment opportunities in the quoted US small cap company universe. It has to be recognised that small cap companies, by their very nature, can be less easily traded and are more risky relative to large cap companies i.e. those in the S&P 500 index, but it is these factors that make the sector more rewarding for long term patient investors and make best use of the Company's investment trust structure.

Outlook

As I mentioned above given the US small cap sector is deemed to be higher risk and therefore more volatile, it naturally follows that there will be periods when this sector experiences a sell-off, often a sharp one. Given the strong recent performance and the fact that the concerns that caused markets to decline sharply in the fourth quarter of 2018 have not gone away, it is important to base any assessment of US small cap on the long term outlook. The Board continues to believe the Company can deliver superior investment returns over the long term based on the highly experienced team of US small cap managers. The team has a clearly defined investment philosophy and a disciplined stock selection process. Over the long term, the US economy has a long history of creating exciting growth prospects in the small cap sector and our Company should continue to take advantage of these opportunities for the reasons set out above.

Davina Walter

Chairman                                                                                                                                     20th August 2019

INVESTMENT MANAGERS' REPORT

Market Review

US equity markets made a strong start to the year, particularly during the first quarter, driven by a powerful rally not seen in US equity markets since the third quarter of 2009. This recovery made up for losses experienced at the end of 2018. The Russell 2000 Index ended the first half of 2019 up 16.9% in sterling terms after a fourth quarter drawdown which saw a more prolonged increase in market volatility.

Equity markets embraced the increasing odds of a Fed rate as 2019 unfolded, and the first rate cut in 10 years in July partly alleviated recessionary fears. However, volatility escalated in May with increased tensions surrounding tariffs between the US and China, in addition to proposed US tariffs on Mexico. Investors took risk off the table given new developments in the trade narrative and signs of slower economic growth globally, despite a still generally constructive earnings backdrop in the US. The numbers for June largely deviated from the increasingly downbeat environment of the previous few months. Driven mostly by increased hopes of a trade deal between the US and China at the G20 summit, the strong performance in equities provided both relief and hope to investors who piled back into the market and drove the Russell 2000 higher.

Performance

The Company's net asset value increased by 21.2% in the first half of 2019. The Trust outperformed the benchmark, the Russell 2000 Index, which increased by 16.9% in GBP. Both our stock selection and sector allocation proved beneficial for the first six months of the year. Additionally, the portfolio's gearing benefitted the Company's performance during the first six months of the year.

With regards to relative performance, our stock selection in the financial services and consumer discretionary sectors proved beneficial.

In the financial services sector, our overweight position in Kinsale Capital Group contributed the most. The specialty property and casualty insurance company has benefitted from larger insurance companies exiting the types of end markets that Kinsale competes in. That allowed the company to take market share, increase pricing and boost their already best in class returns. Another contributor to recent outperformance was the equity market's preference for defensive characteristics, such as those seen in the insurance industry. While we continue to have conviction in the business and management team, we have trimmed our position as valuation has become elevated.

Within the consumer discretionary sector, our exposure to Pool Corporation, the leading wholesale distributor of swimming pool supplies and equipment, added value. The stock reacted well to the company's earnings results, which demonstrated steady revenue growth and margin expansion. However, we believe the primary driver of the stock's outperformance was a general preference for companies with defensive business models amid macro and trade-related uncertainty. While we trimmed our position on strength, the company remains a core holding.

At the stock level, owning Catalent in the health care space was the largest contributor. Shares of the leading provider of advanced drug delivery solutions to the biotechnology and pharmaceutical industries outperformed. The company announced the acquisition of Paragon, a gene therapy drug manufacturing business. We like the acquisition as it could drive long term organic growth and margin expansion for Catalent. We continue to have conviction in the business and the stock remains a top holding in the portfolio.

On the other hand, our stock selection in the technology and energy sectors weighed on relative returns.

Within technology, our overweight position in Sailpoint Technologies hurt performance. The provider of digital identity management solutions traded lower after management reduced revenue guidance, citing execution issues. While we were surprised by the sudden reduction in guidance we continue to believe the company's competitive position remains attractive. We have maintained our position as we assess Sailpoint's ability to move past these issues.

Within energy, our exposure to Patterson UTI emerged as one of the top detractors. The provider of land-based drilling services to the oil and natural gas industry underperformed due to subdued drilling activity because of oil price weakness and volatility. Greater capital discipline across exploration and production companies also contributed to the slower pickup of activity. While we trimmed our position, we believe that the company has navigated this volatile market environment well and is adequate positioned for the eventual increase in onshore drilling activity.

At the stock level, owning the materials & processing name GCP Applied Technologies proved lacklustre. The producer of specialty construction chemicals for coatings, sealants, concretes and other building materials was a top detractor due to disappointing earnings results driven by adverse weather and inventory de-stocking. Additionally, in June the company announced that their strategic review failed to produce an adequate buyer, which also drove shares lower. We maintain our position and have confidence that the company can move past these issues.

Portfolio Positioning

With regards to our portfolio positioning, not much has changed as we continue to focus on finding companies with durable franchises, good management teams and stable earnings that trade at a discount to intrinsic value. The team's new idea production this year has been challenged by high valuations and strong overall stock market performance, which has resulted in two names added to date. The portfolio's positioning remains relatively unchanged. Similar to the previous year, our main allocations are in the financial services, producer durables and consumer discretionary sectors, which make up close to 60% of the overall portfolio's allocation.

On a relative basis, our largest overweights can be found in the producer durables and materials & processing sectors. We expanded our producer durables exposure throughout the year as we initiated new positions and added to others. On the other hand, our largest relative underweight remains in the health care space due to a lack of exposure to biotechnology stocks. The next largest underweight is in technology, where we typically have a difficult time finding opportunities that meet our quality and valuation criteria. Lastly, while our largest absolute weight remains in financial services, we are underweight compared to the benchmark due to our underweight exposure to Real Estate Investment Trusts. At this time, we are comfortable with our relative underweight position as we struggle to add to our exposure due to better opportunities in other sectors.

Market Outlook

We continue to focus on the fundamentals of the economy and of company earnings. Our analysts estimate a continued expansion for 2019 and 2020. While subject to revision, this forecast reflects our expectations for modest expansion in the underlying economy and includes our best analysis of earnings expectations for this year. The implications of trade will be integral to investor sentiment and will likely continue to contribute to the uncertainty moving forward.

While continued earnings growth should provide support to the equity market, we are monitoring the incremental risks that could represent headwinds for US stocks. In particular, we continue to watch closely the state of trade relations, movements in global economic growth, and the implications of Fed policy, all of which have the potential to heighten volatility.

Don San Jose

Dan Percella

Jon Brachle

Investment Managers                                                                                                                           20th August 2019

INTERIM MANAGEMENT REPORT

The Company is required to make the following disclosures in its Half Year Report:

Principal Risks and Uncertainties

The principal risks and uncertainties faced by the Company remain unchanged and fall into the following broad categories: investment and strategy; loss of investment team or investment managers; discount; market; political and economic; accounting, legal and regulatory; corporate governance and shareholder relations; operational; cybercrime; foreign currency; going concern; and financial. Information on each of these areas is given in the Business Review within the Annual Report and Financial Statements for the year ended 31st December 2018.

Related Parties Transactions

During the first six months of the current financial year, no transactions with related parties have taken place which have materially affected the financial position or the performance of the Company.

Going Concern

The Directors believe, having considered the Company's investment objectives, risk management policies, capital management policies and procedures, nature of the portfolio and expenditure projections, that the Company has adequate resources, an appropriate financial structure and suitable management arrangements in place to continue in operational existence for the foreseeable future and, more specifically, that there are no material uncertainties pertaining to the Company that would prevent its ability to continue in such operational existence for at least twelve months from the date of the approval of this half yearly financial report. For these reasons, they consider there is reasonable evidence to continue to adopt the going concern basis in preparing the accounts.

Directors' Responsibilities

The Board of Directors confirms that, to the best of its knowledge:

(i)      the condensed set of financial statements contained within the half year financial report has been prepared in accordance with FRS 104 'Interim Financial Reporting' and gives a true and fair view of the state of affairs of the Company, and of the assets, liabilities, financial position and net return of the Company as at 30th June 2019 as required by the UK Listing Authority Disclosure and Transparency Rules 4.2.4R; and

(ii)     the interim management report includes a fair review of the information required by 4.2.7R and 4.2.8R of the UK Listing Authority Disclosure and Transparency Rules.

In order to provide these confirmations, and in preparing these financial statements, the Directors are required to:

•        select suitable accounting policies and then apply them consistently;

•        make judgements and accounting estimates that are reasonable and prudent;

•        state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and

•        prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business;

and the Directors confirm that they have done so.

For and on behalf of the Board

Davina Walter

Chairman                                                                                                                                          20th August 2019

STATEMENT OF COMPREHENSIVE INCOME

FOR THE SIX MONTHS ENDED 30TH JUNE 2019

	(Unaudited)			(Unaudited)			(Audited)
	Six months ended			Six months ended			Year ended
	30th June 2019			30th June 2018			31st December 2018
	Revenue	Capital	Total	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Gains/(losses) on investments
held at fair value through
profit or loss	-	33,706	33,706	-	14,968	14,968	-	(8,913)	(8,913)
Net foreign currency
losses on cash and loans	-	(77)	(77)	-	(178)	(178)	-	(471)	(471)
Income from investments	1,451	-	1,451	1,252	-	1,252	2,561	-	2,561
Interest receivable	98	-	98	59	-	59	132	-	132
Gross return/(loss)	1,549	33,629	35,178	1,311	14,790	16,101	2,693	(9,384)	(6,691)
Management fee	(190)	(761)	(951)	(90)	(814)	(904)	(191)	(1,718)	(1,909)
Other administrative expenses	(263)	-	(263)	(220)	-	(220)	(477)	-	(477)
Net return/(loss) before
finance costs and taxation	1,096	32,868	33,964	1,001	13,976	14,977	2,025	(11,102)	(9,077)
Finance costs	(52)	(203)	(255)	(17)	(151)	(168)	(47)	(425)	(472)
Net return/(loss) before
taxation	1,044	32,665	33,709	984	13,825	14,809	1,978	(11,527)	(9,549)
Taxation	(222)	-	(222)	(185)	-	(185)	(406)	-	(406)
Net return/(loss) after
taxation	822	32,665	33,487	799	13,825	14,624	1,572	(11,527)	(9,955)
Return/(loss) per share (note 3)	1.42p	56.53p	57.95p	1.40p	24.29p	25.69p	2.75p	(20.17)p	(17.42)p

No interim dividend has been declared in respect of the six months ended 30th June 2019 (2018: nil).

All revenue and capital items in the above statement derive from continuing operations.

The 'Total' column of this statement is the profit and loss account of the Company and the 'Revenue' and 'Capital' columns represent

supplementary information prepared under guidance issued by the Association of Investment Companies.

The net return on ordinary activities after taxation represents the profit for the period/year and also the total comprehensive income.

STATEMENT OF CHANGES IN EQUITY

FOR THE SIX MONTHS ENDED 30TH JUNE 2019

	Called up		Capital
	share	Share	redemption	Capital	Revenue
	capital	premium	reserve	Reserves1	Reserve1	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Six months ended 30th June 2019 (Unaudited)
At 31st December 2018	1,445	13,291	1,851	140,543	1,701	158,831
Repurchase of shares into Treasury	-	-	-	(62)	-	(62)
Net return for the period	-	-	-	32,665	822	33,487
Dividend paid in the period (note 4)	-	-	-	-	(1,445)	(1,445)
At 30th June 2019	1,445	13,291	1,851	173,146	1,078	190,811
Six months ended 30th June 2018 (Unaudited)
At 31st December 2017	1,424	10,421	1,851	151,440	1,551	166,687
Issue of new ordinary shares	8	960	-	-	-	968
Shares reissued from Treasury	-	331	-	634	-	965
Net return for the period	-	-	-	13,825	799	14,624
Dividend paid in the period (note 4)	-	-	-	-	(1,422)	(1,422)
At 30th June 2018	1,432	11,712	1,851	165,899	928	181,822
Year ended 31st December 2018 (Audited)
At 31st December 2017	1,424	10,421	1,851	151,440	1,551	166,687
Issue of new ordinary shares	21	2,522	-	-	-	2,543
Shares reissued from Treasury	-	348	-	1,054	-	1,402
Repurchase of shares into Treasury	-	-	-	(424)	-	(424)
Net (loss)/return for the year	-	-	-	(11,527)	1,572	(9,955)
Dividends paid in the year (note 4)	-	-	-	-	(1,422)	(1,422)
At 31st December 2018	1,445	13,291	1,851	140,543	1,701	158,831

¹ These reserves form the distributable reserves of the Company and may be used to fund distributions to investors via dividend payments.

STATEMENT OF FINANCIAL POSITION

AT 30TH JUNE 2019

	(Unaudited)	(Unaudited)	(Audited)
	30th June 2019	30th June 2018	31st December 2018
	£'000	£'000	£'000
Fixed assets
Investments held at fair value through
profit or loss	196,177	194,016	168,014
Current assets
Debtors	772	209	1,211
Cash and cash equivalents	9,782	3,610	5,382
	10,554	3,819	6,593
Current liabilities
Creditors: amounts falling due within one year1	(15,920)	(16,013)	(15,776)
Net current liabilities	(5,366)	(12,194)	(9,183)
Total assets less current liabilities	190,811	181,822	158,831
Net assets	190,811	181,822	158,831
Capital and reserves
Called up share capital	1,445	1,432	1,445
Share premium	13,291	11,712	13,291
Capital redemption reserve	1,851	1,851	1,851
Capital reserves	173,146	165,899	140,543
Revenue reserve	1,078	928	1,701
Total shareholders' funds	190,811	181,822	158,831
Net asset value per share (note 5)	330.3p	317.4p	274.8p

¹ At 30th June 2019, the Company had drawn down US$20.0m (GBP £15.7m equivalent) on its loan facility with Scotiabank.

STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED 30TH JUNE 2019

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th June 2019	30th June 2018	31st December 2018
	£'000	£'000	£'000
Net cash outflow from operations before dividends
and interest	(1,231)	(1,147)	(2,385)
Dividends received	1,252	1,147	2,186
Interest received	81	56	139
Overseas tax recovered	22	25	24
Interest paid	(136)	(172)	(531)
Net cash outflow from operating activities	(12)	(91)	(567)
Purchases of investments	(22,628)	(23,333)	(55,685)
Sales of investments	28,613	20,446	53,196
Settlement of forward currency contracts	4	(9)	(2)
Net cash inflow/(outflow) from investing activities	5,989	(2,896)	(2,491)
Dividend paid	(1,445)	(1,422)	(1,422)
Issue of new ordinary shares	-	968	2,543
Shares reissued from Treasury	-	965	1,402
Repurchase of shares into Treasury	(62)	-	(424)
Net cash (outflow)/inflow from financing activities	(1,507)	511	2,099
Increase/(decrease) in cash and cash equivalents	4,470	(2,476)	(959)
Cash and cash equivalents at start of period/year	5,382	5,891	5,891
Foreign exchange (losses)/gains	(70)	195	450
Cash and cash equivalents at end of period/year	9,782	3,610	5,382
Increase/(decrease) in cash and cash equivalents	4,470	(2,476)	(959)
Cash and cash equivalents consist of:
Cash and short term deposits	1	-	18
Cash held in JPMorgan US Dollar Liquidity Fund	9,781	3,610	5,364
Total	9,782	3,610	5,382

NOTES TO THE FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED 30TH JUNE 2019

1.       Financial statements

The information contained within the financial statements in this half year report has not been audited or reviewed by the Company's auditors.

The figures and financial information for the year ended 31st December 2018 are extracted from the latest published financial statements of the Company and do not constitute statutory accounts for that year. Those financial statements have been delivered to the Registrar of Companies, including the report of the auditors which was unqualified and did not contain a statement under either section 498(2) or 498(3) of the Companies Act 2006.

2.       Accounting policies

The financial statements have been prepared in accordance with the Companies Act 2006, FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' of the United Kingdom Generally Accepted Accounting Practice ('UK GAAP') and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' (the revised 'SORP') issued by the Association of Investment Companies in November 2014 and updated in February 2018.

FRS 104, 'Interim Financial Reporting', issued by the Financial Reporting Council ('FRC') in March 2015 has been applied in preparing this condensed set of financial statements for the six months ended 30th June 2019.

All of the Company's operations are of a continuing nature.

The accounting policies applied to this condensed set of financial statements are consistent with those applied in the financial statements for the year ended 31st December 2018.

3.       Return/(loss) per share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th June 2019	30th June 2018	31st December 2018
	£'000	£'000	£'000
Return/(loss) per share is based on the following:
Revenue return	822	799	1,572
Capital return/(loss)	32,665	13,825	(11,527)
Total return/(loss)	33,487	14,624	(9,955)
Weighted average number of shares in issue	57,787,453	56,923,613	57,156,038
Revenue return per share	1.42p	1.40p	2.75p
Capital return/(loss) per share	56.53p	24.29p	(20.17)p
Total return/(loss) per share	57.95p	25.69p	(17.42)p

4.       Dividend paid

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th June 2019	30th June 2018	31st December 2018
	£'000	£'000	£'000
Final dividend in respect of the year ended
31st December 2018 of 2.5p   (2017: 2.5p)	1,445	1,422	1,422
Total dividend paid in the period/year	1,445	1,422	1,422

The dividends paid in the period/year have been funded from the revenue reserve.

5.       Net asset value per share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th June 2019	30th June 2018	31st December 2018
Net assets (£'000)	190,811	181,822	158,831
Number of shares in issue	57,771,928	57,276,928	57,791,928
Net asset value per share	330.3p	317.4p	274.8p

For further information, please contact:

Lucy Dina

For and on behalf of

JPMorgan Funds Limited, Secretary

020 7742 4000

Please note that up to date information on the Company, including daily NAV and share prices, factsheets and portfolio information can be found at www.jpmussmallercompanies.co.uk

Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.

JPMORGAN FUNDS LIMITED

ENDS

A copy of the Half Year Report has been submitted to the National Storage Mechanism and will shortly be available for inspection at www.morningstar.co.uk/uk/NSM 

The Half Year Report will also shortly be available on the Company's website at www.jpmussmallercompanies.co.uk where up to date information on the Company, including daily NAV and share prices, factsheets and portfolio information can also be found.

 

END

 

 

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